You began your retirement plan with plenty of money to pay bills. Your plan expectation of a reasonable inflation rate worked for years. But now one of the key assumptions of your plan has collapsed. Annual inflation was recently running at some six percent, a thirty year high.

That’s why, for millions of elderly Americans living on fixed incomes, inflation is the cruelest tax. It hurts their ability to maintain a standard of living.“

A retired person is said to be living on a fixed income for a good reason. In turn, coping with rising prices when one’s income is fixed is far more difficult that for a younger person who can negotiate a pay raise from their employer,” according to Peter Palion, an advisor in East Norwich, New York.

A Unique Problem

So the problem of long-term high inflation hurts senior citizens in a unique way, another advisor adds.

Most retirees, notes Jordan Benold, an advisor in Frisco, Texas, either have Social Security and/or receive a monthly pension. But pensions have a downside, he adds.

“Pensions usually do not have inflation adjustments which mean when the prices of good go up, the elderly cannot afford to pay for the same basket of goods,” according to Benold.

Even relatively small inflation rates can have a dramatic effect on elderly living standards.

You Lost Dropped Six Figures

The Secure Retirement Institute Retail Retirement Reference Center conducted research that shows if inflation increases to 3%, the average retiree stands to lose $117,000.

It’s challenging for the elderly to make up for these price increases, advisors say. That’s because most are past their prime earning years and many live on a budget that can’t adjust to higher prices.

This has had a dramatic effect on the ability of the retiree to maintain a standard of living.

“The impact of inflation has caused Americans’ living expenses of $50,000 in 1983 to go up to $133,527 in 2021, an increase of more than 160%,” according to the Retail Retirement Reference Center. “The 1983 retiree’s $100 income is now worth about $37.45 in purchasing power of goods and services in 2021.”

Hurting Your Parents and Grandparents

Inflation, advisors explain, affects retired Americans more than workers for several reasons: Most retirees generate less income than they did in their working years.

Retirees often devote a substantially larger share of their total budgets to medical and housing costs: Both have gone up faster than normal in the recent past, certainly as a faster pace than most other consumer goods.

“Inflation is difficult for the elderly because the size of their income is normally outside their control,’ according to Zachary Bachner, an adviser in Sterling Heights, Michigan.

Advisors also note that most people face the heaviest medical bills in their last decade or so.

According to the Centers for Medicare and Medicaid Services (CMS), per capita, health spending for elderly Americans was recently three times that of a working adult and five times that of children, averaging $19,098 annually.

In 2018 (the most recent data as of Dec. 1, 2020), the CMS estimated that healthcare expenditures increased by 4.6% overall. Over that period, inflation averaged 2.4%

Always a Problem

So even when inflation is low, retirees are hit harder than others since costs that affect them most, health care, tend to continue to rise, advisors say.

The goal of all retirement planning is ensuring assets outlive the retiree, advisors say. That means retirement investments should be big enough to weather bad times; times when inflation rates are high and one’s investment returns are low.

An Arizona advisor believes the problem is some retirees have plan assets that can be overwhelmed by inflation.
The have “poor inflation hedging assets,” explains Matthew Aaron Benson, an advisor in Chandler, Arizona.

He says normally many retirees try to avoid risk by adding more bonds to the portfolio. But this strategy sometimes fails, Benson warn, because high inflation rates will eat up moderate investment gains.

“Once you enter a rising rate environment combined with an inflationary environment you can have fixed income assets that in real returns after factoring in inflation just safely lose money,” Benson explains.

Any Help?

Some of these retirees, Benson adds, should consider more stocks, real estate investment trusts (REITs) or bonds designed to withstand high inflation rates. “For lower risk options one could use a treasury inflation protected securities (TIPS) fund also.”

What else should retirees do?

Monitor your budget; try to find investments that beat or keep up with inflation, Bachner says “It is much easier,” he adds, “to survive inflation if you have some type of investable asset. However, that is not the case for everyone. Those who have investable assets can potentially generate a rate of return higher than inflation to offset the rising costs of living.”

Stocks, or Some Stocks, for the Elderly

That, advisors say, means some retirees should seek higher investment returns through stocks. Stocks, also known as equities, are the investment that tends to have the best long-term returns. However, stocks have a downside. Stocks generally have the best long-term returns but in the short term they can be rocky. They are volatile.

That means stocks can have rapid drops and rapid gains, although no one complains about the latter. Some retirees avoid stocks, having bond heavy portfolios. They should reconsider, says another advisor.

“Some elderly, relying on their experience over the past 30 years, keep their savings in bonds,” notes Linda Erickson, an advisor in Greensboro, North Carolina.

That approach, she contends, sometimes doesn’t produce enough income for retirees facing inflation.

“To insulate a portfolio from a decline in buying power,” Erickson adds, “A good advisor should encourage elderly clients to consider a portfolio of Total Return, a mix of equity and bonds, which may give those investors a return over and above the rate of inflation.”

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Gregory Bresiger
Gregory Bresiger

Gregory Bresiger is an independent financial journalist from Queens, New York. His articles have appeared in publications such as Financial Planner Magazine and The New York Post.